|CITES BY TOPIC: personal services|
The term "personal service" is nowhere defined in 26 U.S.C. and defined only once in the Treasury Regulations. Below is the only definition, and note that it is connected with a "trade or business", which is defined in 26 U.S.C. §7701(a)(26) to include the performance of the functions of a public office.
26 CFR Sec. 1.469-9 Rules for certain rental real estate activities.
(b)(4) PERSONAL SERVICES. Personal services means any work performed by an individual in connection with a trade or business. However, personal services do not include any work performed by an individual in the individual's capacity as an investor as described in section 1.469-5T(f)(2)(ii).
(a)(3) "...Compensation for labor or personal services performed in the United States shall not be deemed to be income from sources within the United States if-
(C) the compensation for labor or services performed as an employee of or under contract with--
(b) Trade or business within
the United States
[Code of Federal Regulations]
(a) In general.
As used in part I (section 861 and following) and part II (section 871 and following), subchapter N, chapter 1 of the Code, and chapter 3 (section 1441 and following) of the Code, and the regulations thereunder, the term ``engaged in trade or business within the United States'' does not include the activities described in paragraphs (c) and (d) of this section, but includes the performance of personal services within the United States at any time within the taxable year except to the extent otherwise provided in this section.
(b) Performance of personal services for foreign employer--
(1) Excepted services.
For purposes of paragraph (a) of this section, the
term ``engaged in trade or business within
the United States'' does not include the performance of personal services--
26 CFR Sec. 1.162-7 Compensation for personal services.
(a) There may be included among the ordinary and necessary expenses paid or incurred in carrying on any trade or business a reasonable allowance for salaries or other compensation for personal services actually rendered. The test of deductibility in the case of compensation payments is whether they are reasonable and are in fact payments purely for services.
(b) The test set forth in paragraph (a) of this section and its practical application may be further stated and illustrated as follows:
(1) Any amount paid in the form of compensation, but not in fact as the purchase price of services, is not deductible. An ostensible salary paid by a corporation may be a distribution of a dividend on stock. This is likely to occur in the case of a corporation having few shareholders, practically all of whom draw salaries. If in such a case the salaries are in excess of those ordinarily paid for similar services and the excessive payments correspond or bear a close relationship to the stockholdings of the officers or employees, it would seem likely that the salaries are not paid wholly for services rendered, but that the excessive payments are a distribution of earnings upon the stock. An ostensible salary may be in part payment for property. This may occur, for example, where a partnership sells out to a corporation, the former partners agreeing to continue in the service of the corporation. In such a case it may be found that the salaries of the former partners are not merely for services, but in part constitute payment for the transfer of their business.
(2) The form or method of fixing compensation is not decisive as to deductibility. While any form of contingent compensation invites scrutiny as a possible distribution of earnings of the enterprise, it does not follow that payments on a contingent basis are to be treated fundamentally on any basis different from that applying to compensation at a flat rate. Generally speaking, if contingent compensation is paid pursuant to a free bargain between the employer and the individual made before the services are rendered, not influenced by any consideration on the part of the employer other than that of securing on fair and advantageous terms the services of the individual, it should be allowed as a deduction even though in the actual working out of the contract it may prove to be greater than the amount which would ordinarily be paid.
(3) In any event the allowance
for the compensation paid may not exceed what is reasonable under all
the circumstances. It is, in general, just to assume that reasonable
and true compensation is only such amount as would ordinarily be paid
for like services by like enterprises under like circumstances. The
circumstances to be taken into consideration are those existing at the
date when the contract for services was made, not those existing at
the date when the contract is questioned.
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